Finance Minister Tito Mboweni has said that South Africa’s economy could contract as much as 6.4% this year, following the coronavirus pandemic, while the budget deficit and debt to GDP ratios will hit alarming levels and tax revenue losses will be substantial.
In Mboweni’s conference call with clients of the Goldman Sachs Group, which was reported on by Bloomberg, he predicted a contraction of 6.4% of the economy – as opposed to the IMF’s earlier forecast of 5.8%. However, he did say that it is possible that a rebound to 4% growth may be possible at a later stage if adequate economic restructuring is put in place following new lender projects that are set to be phased in in 2021. He also added that tax revenue may fall by almost a third of it’s current levels which have already been a concern as of late.
“We are operating under very severe constraints,” he said on the call, as reported by Bloomberg.
He added that the projected rebound “is possible but will require South Africa to be quite strong in structural reforms and the recapitalization of some of the firms which may come under stress during this period. (There will be) quite some substantial tax losses, probably totaling some minus 32%.”
The real concern, however, is his predictions on the budget deficit, which he predicts will be as above 10% of GDP, and the debt to GDP ratio, which he believes could stand at 80%. “we are very concerned about (it)” he stated.
Numbers and figures like these can often be lost on the average reader, so perhaps it would be helpful for some if we can lay it out in simpler terms. There are several concerns with our economy at the moment. We all knew it would be bad, especially given the state of the economy before the coronavirus shut almost all economic activity down completely. Here are some basic indicators explained: – The dollar to rand value currently stands at $1=ZAR18.46 In January, it was R14.30. At the end of April 2019, it was R14.06. In April 2010 it was R7.25. The rand to dollar value is remarkably important for our imports and exports. All of the goods that South Africa imports now cost significantly more than they did a month ago, a year ago and, in fact, cost more than double of what they did 10 years ago, simply because the rand is worth less. However, there is a tiny, tiny bright side to this story. More importers will be keen to buy South African goods because they will cost so little.
– 6.4% economic contraction Now economic growth for economies around the world is different. Most developed economies around the world, like the US, would place the ideal growth rate at anywhere between 2% and 3%. Developing economies are different though, because they come off a much lower base. For 2020, the South African Reserve Bank set our target GDP growth rate at between 3% and 6%. Growing at 1.5% may have been bad, but a contraction is a disaster. A contraction of 6.4% is an unmitigated catastrophe.
– Budget deficit of more than 10% of GDP A budget deficit, quite simply, is when spending exceeds revenue. And a consequence of a budget deficit is typically a rise in inflation. Under normal circumstances, some can argue that a budget deficit isn’t all that bad. Deficits can lead to recessions, which normally leads to raising taxes and cutting spending to turn the economy around. And the excess spending can even result in economic growth sometimes, if stability is achieved. he economy improves due to the deficit spending the outlook for businesses also improves, and this can lead to increased investment, an effect known as “crowding in”. In fact, many economists argue that a budget deficit is essential for economic growth… but under normal circumstances, that would be referring to a far smaller deficit like a fraction of a percentage point. In the United States, a relatively free spending economy, the budget deficit has rarely ever exceeded 3%. Not even in the darkest days of the Great Depression did it reach 10%. And we are most certainly facing a crisis bigger than that. With a junk status economy, we will not be receiving an influx of investment and “crowding in” simply isn’t on the cards here. Every bit of additional spending in South Africa is going to be pure debt. It’s money we don’t have and that we have very little chance to pay back. This is why many members of the ANC are opposed to borrowing money from the IMF, because it could compromise our sovereignty and, going forward, we may permanently be at the mercy of one of the most uncompromising global financial institutions that has a chequered history of exploiting African nations.
– 80% Debt to GDP ratio For developing countries, the threshold that should technically never ever be breached in terms of Debt to GDP ratio is 40% – that would be considered unhealthy, but still within the limits of manageable. Double that is simply unthinkable. The good news is that we are still way off the highest debt to GDP ratio in the world, a badge that belongs to Japan, whose figure stands at 253% (as of June 2019). However, a high debt to GDP ratio is only acceptable if an economy is growing at a rapid rate, because future earnings will be able to pay off the debt faster. Japan has a growth rate that has averaged at around 3% since the 1950s and is the third largest economy in the world. That’s not to say they’re in an economically favourable position right now, but at the very least they can claim to be growing, albeit at a declining rate. It would not be unfathomable for you to predict Japan has a chance at repaying its debts someday, or that they will at least be able to manage the installments on their payment packages. For us, it is a little harder to see that happening…
Of course, each individual issue on its own is not so easy to unpack and there’s a lot more to it. And the complexity of the decision making, taking all factors into account is a very difficult task indeed. Mr Mboweni’s position is not what one may deem as desirable right now – not even close. But the first step to gaining support for any future decisions that he may make is for South Africans to understand the precarious position that our economy finds itself in.